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Debt and Structural Adjustment (September 26).docx

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International Development
INTD 200
Warren Allmand

WEDNESDAY, SEPTEMBER 26, 2012: Debt and Structural Adjustment  How did debt get accumulated? Post WWII, there was a lot of lending from the IMF and the World Bank to support Keynesian model economics. A lot of this lending was using to prop up dictators—corruption in how the loans were distributed to different countries.  1970s: the era of surplus capital and loan pushing  there was an increase in loan pushing. The growth of the world economy stopped (it was growing due to Japan and Europe recovering, and this was completed). The developing world was growing slowly. There was less demand for comedies being exported by the developing world, and the US had racked up debt to support wars, projects during the Cold War, etc.  There was an economic crisis at the end of the 1970s  The value of the dollar dropped (it was pinned to gold at that time— the gold standard) due to this slowed growth. The US didn’t have enough gold to back up the dollar and the gold standard was taken away and the currencies were allowed to float again each other— financial instability  At the same time, OPEC increased the price of oil considerably.  Interest rates were low and there was a focus on loan pushing the 1970s to developing countries because banks wanted to loan. This caused an increase in loans and an increase in debt. Low inflation+ low interest rates—the countries were told they could pay back less than they borrowed (a negative interest rate).  The US response to the crisis was to impose a neo-liberal model (reduced role of state, smaller government, privatization, and reduced regulation for trade, lower taxes, encouraging free movement of goods and capitals across borders.).  In the early 1980s, interest rates increased (due to the economic crisis). It was imposed by Reagan and intended to end inflation and cause a move of money from the South to the North. It caused a shock in developing countries that borrowed a low of money at low interest rates. They ended up taking out loans to pay interest on the loans they had already taken, and ended up with a huge racking up of debt.  1982: Debt crisis in South, Mexico, Brazil, Argentina, Poland, default on loan payments with the IMF and the World Bank because the interest rates were too high. People weren’t benefitting from the money from the loans.  Banks were afraid if they didn’t do anything, the international financial system would meltdown. As a response there was a restructuring of debt re- payments (longer repayment time), borrowing/lending of more money to pay debt interest. Within a decade, between 1980-1990  The IMF and World Bank took the lead role in managing the debt crisis but focused on the northern interest. The defaulting issue was blamed on the countries in debt, not the irresponsible loaners. They recognized the increased interest rates were a problem and they realized the banks didn’t allocate the loans well, but it was still blamed on developing countries.  The IMF and World Bank created SAPs to solve this issue: Structural Adjustment Programs (SAPs):  Reversion to free market, reduction of the role of the state, and based on neo-liberal ideas. They required state intervention to restructure the economy. They were anti-statist (giving states less control). This was a reversion to the Keynesian style development model (which wanted government management). GOALS: a. Promotion of free trade and mobilization of domestic production for the market. o Fr
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